Although the stock has done well over the last couple of weeks, it hasn’t been fun to be a long-term shareholder of Bombardier Inc (TSX: BBD.B). Since 2009, shareholders have lost 16% of their capital, excluding dividends. That makes Bombardier one of the worst-performing stocks in the TSX Composite.
The company’s troubles largely stem from its struggles to get its line of CSeries business jets to market. The program has been plagued by cost overruns, delays, and most recently, an engine failure during a test flight. Analysts speculate that this latest setback will lead to yet another delay of delivering jets to customers, which was already pushed back six to 12 months earlier in 2014.
These setbacks have led most of Bay Street to be bearish about Bombardier’s prospects, with some folks even going as far as doubting the company’s ability to come up with the capital to repay $750 million worth of debt that comes due in 2015. Why would anybody want to invest in this company? Let’s take a closer look.
The bull case
Investors who are bearish on Bombardier have valid points. The CSeries program has been nothing short of a quagmire. The company does have a lot of debt, most of which was caused by CSeries cost overruns. Competitors are coming up with competing planes, like Mitsubishi out of Japan. But there’s a lot to get excited about too.
The glass-half-full case goes something like this. Yes, the CSeries has been pretty bad. But it’s almost finished. Even if the company delays deliveries one last time, we’re still only about a year away from it finally starting to make money selling planes.
As I write this, Bombardier has firm orders for 180 model CS300 planes and 63 model CS100 planes, plus customer options for 162 additional planes. At an average purchase price of between $65 million and $70 million depending on the model, the company is sitting on more than $16 billion worth of aircraft orders, and that’s assuming customers don’t exercise a single option. If customers exercise just half of the current options, that’s an additional $6 billion worth of business. Even without a single additional order, that’s enough to keep workers busy until 2018 or 2019.
Plus, things look bullish for the company’s train division as well. In today’s world of traffic congestion, low salaries, and environmentally conscious consumers, public transit is more popular than ever. Many cities across the world are expanding their subway systems. This trend should continue for decades. Yes, Bombardier has competitors in the space, but it’s well known as a leader. It’ll get a healthy share of the market.
All things considered, the company’s balance sheet should be able to weather the storm until CSeries revenues start boosting profits. Its cash balance is in excess of $3 billion, and the rail division is already profitable enough to cover current interest payments and pay investors a 2.6% dividend.
Get paid to wait
If Bombardier announces another delay of CSeries deliveries, there’s no doubt the stock will crater. It could easily drop 10%, perhaps even more.
Which is why I like investing in this story a little more indirectly. Instead of buying the common shares, investors should buy the company’s series C preferred shares. They trade under the ticker symbol BBD.PR.C.
These preferred shares currently sell for a just a little more than $21 each, and pay a quarterly dividend of $0.3906 per share, good enough for a 7.4% yield. They’re a perpetual issue, meaning they act just like a bond without a set maturity date. The company is able to buy out preferred shareholders at $25 a share, but that’s not likely for at least a few more years.
The beauty of this is the stability of the preferred shares. They won’t go up as much as the common shares when there’s good news, but they’ll be more stable if bad news comes down the pipeline. And the sweet dividend doesn’t hurt, either.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith has no position in any stocks mentioned.